How to Increase Public Pension Fund Investment in U.S. Infrastructure

Two of America’s big public policy problems could be addressed together. One major policy problem is that many state and local public employee pension systems are seriously underfunded, risking the retirement security of millions of public servants. Another big problem is that many of America’s highways and bridges need major reconstruction and modernization, but states are struggling to fund those projects.

President Joe Biden’s American Jobs Plan would invest $2 trillion in what the administration labels as infrastructure projects but would devote only $115 billion over eight years to roads and bridges. That’s not nearly enough, according to a national commission appointed by Congress that estimated reconstructing the aging pavement and bridges on the Interstate Highway System would cost at least $1 trillion over the next 20 years.

How are public pension systems relevant to the need to rebuild highways?

One example is the Indiana Toll Road (I-80/I-90), which in 2005 was long-term leased for 75 years via a public-private partnership (P3). The owners of that long-term public-private partnership are dozens of U.S. public pension funds, organized by IFM Investors, which specializes in finding long-term infrastructure investments for pension systems to invest in.

Another example is the Chicago Skyway, whose long-term P3 lease is held by three of the largest Canadian public pension systems.

In these kinds of long-term public-private partnerships, the winning bidder is responsible for operating, maintaining, upgrading, and rebuilding the infrastructure, as needed. It is subject to oversight by its government partner, usually the state department of transportation. On the Indiana Toll Road, for example, the P3 company has repaved most of the highway, revamped and modernized its service plazas, added truck parking facilities, and is now adding electric vehicle charging facilities.

America’s public pension systems are increasingly seeking reliable long-term investments in revenue-generating infrastructure, such as airports, seaports, and tolled roads and bridges. Most of the pension systems’ transportation infrastructure investments are outside the United States, however. That’s because the pension systems want to invest equity—but government-owned airports, seaports, and toll roads are entirely financed by debt. Overseas, large numbers of airports, seaports, and toll roads have been long-term leased to investors, so that is where most U.S. pension equity investments in transportation infrastructure are going.

Federal law permits government airport owners to enter into long-term public-private partnership leases, and Puerto Rico has transformed the San Juan airport via this kind of P3. But in the highway field, 95 percent of the aging Interstate system is non-tolled, so it would be of no interest to pension systems unless the P3 lease included the ability to charge tolls, which would create a bondable revenue stream and the potential of earning a return on equity.

Congress could address this situation by expanding the current three-state pilot program on toll-financed Interstate reconstruction to include all 50 states and allowing any participating state to rebuild all of its aging Interstates via toll financing, instead of only one.

One other action for Congress would be to expand the current authorization for tax-exempt private activity bonds (PABs), removing the $15 billion cap (which has all been used up) and clarifying the law to ensure that PABs can be used to finance the reconstruction and modernization of existing infrastructure, not just to build new facilities.

These two changes—public-private partnership toll projects on Interstates and private activity bonds expansion—would open the door for significant public pension fund investment in upgrading and reconstructing America’s aging Interstate highways. Fixing highways and bridges, while also helping produce public pension system returns on equity, would be a winning combination.